The present invention relates generally to the refinancing of consumer debt instruments. More specifically, the present invention relates to a system and a method for determining whether to refinance a consumer debt instrument, such as, a mortgage.
Consumers often obtain financing in connection with purchases of assets of significant value. For example, most consumers, who purchase a home or a condominium or a car, obtain financing secured by the value of the purchased asset. A home or a condominium is usually a person's single largest asset. Further, the purchase price of a home or condominium may exceed the buyer's net worth and often exceeds that person's annual income by a multiple of two, three, or even more. Consumers usually finance the purchase of their homes or condominiums through mortgages. A mortgage includes a security interest on the house or the condominium and a debt instrument in the form of a promissory note providing for payment of the debt, usually on a monthly basis. In order to minimize monthly mortgage payments, consumers usually obtain long-term mortgages with notes in which payment of the mortgage principal is amortized over a period of years, generally ten, fifteen or thirty years. Similarly, consumers who purchase cars often obtain financing which involves a promissory note specifying how the loan is to be paid and a security interest on the car to guarantee payments. Most car loans are amortized over a shorter time than mortgages, often two to five years.
Most home mortgages currently fall into two categories with respect to interest calculations: fixed-rate mortgages (FRM) and adjustable-rate mortgages (ARM). FRMs carry a fixed interest rate until they are fully amortized or until they are paid off early because the home has been sold or the FRM is refinanced. ARMs carry an interest-rate that adjusts periodically, usually but not necessarily on the anniversary date of the mortgage. In recent years, some homebuyers have obtained hybrid mortgages which are a combination of FRMs and ARMs. Such hybrid mortgages continue for a period of time as fixed rate mortgages (FRMs) and at a pre-determined time (which may be selected by the mortgagor), the FRM is converted to an ARM on pre-agreed terms.
In the United States, most mortgages can be paid off prior to the maturity date and most mortgages can be paid off without a pre-payment penalty. Some mortgages and many other consumer debt instruments impose pre-payment penalties if the instrument is paid before the maturity date. For various reasons, it may be advantageous for a consumer to refinance his or her debt instrument, such as a mortgage note. For example, if the interest rate falls low enough the consumer may realize savings by replacing its existing debt instrument with a new debt instrument carrying a lower interest rate. Even if a debt instrument provides for a pre-payment penalty, the savings due to the lower interest rate of the new instrument can make the refinancing advisable. However, refinancing often involves substantial costs aside from a pre-payment penalty. For example, a homeowner who refinances his or her mortgage typically must pay appraisal fees, title insurance fee, application fees, settlement fees, and a host of other fees, costs and taxes. The fees, costs and taxes associated with refinancing of a mortgage can easily boost the total cost of refinancing to thousands of dollars even where there is no pre-payment penalty. The homeowner usually pays cash up front to cover the refinancing costs or, in the alternative, finances them in the replacement mortgage. In the alternative, some of the costs may be paid up front and the rest included in the replacement mortgage.
Deciding when to refinance a consumer debt instrument, such as a mortgage, can be a financially important decision regardless of whether such instrument can be refinanced at will, only a predetermined number of times or only once. If the instrument can be refinanced at will or multiple times, refinancing should be considered if it results in savings. However, because of the costs associated with refinancing and/or prepayment penalties, multiple refinancings can eliminate much or, in some cases all of the savings resulting from such refinancings. If the mortgagor has only one opportunity to initiate the refinancing process, the decision to refinance can be even more critical to mortgagor's finances. In addition, while refinancing consumer debt today may result in considerable savings for the consumer, refinancing the same debt tomorrow may make even better sense depending upon future interest rates.
Accordingly, there is a need for determining for a given debt instrument whether it is optimal at any given time or for any given conditions to initiate the refinancing process or to lock the interest rate on a debt instrument, such as the interest rate on a mortgage.